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Production Possibility Frontier

The document discusses two economic laws: 1) The law of increasing opportunity cost, which states that as more resources are allocated to producing one good, less can be produced of the other good, and the opportunity cost rises. This is demonstrated by a production possibilities curve showing diminishing returns. 2) The law of diminishing marginal returns, which explains that after a certain point, adding more labor to a fixed amount of capital and land will result in lower incremental production due to congestion and lack of resources per worker. Marginal productivity declines as more workers are added without increasing other inputs.

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Alex Moore-Minott
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171 views2 pages

Production Possibility Frontier

The document discusses two economic laws: 1) The law of increasing opportunity cost, which states that as more resources are allocated to producing one good, less can be produced of the other good, and the opportunity cost rises. This is demonstrated by a production possibilities curve showing diminishing returns. 2) The law of diminishing marginal returns, which explains that after a certain point, adding more labor to a fixed amount of capital and land will result in lower incremental production due to congestion and lack of resources per worker. Marginal productivity declines as more workers are added without increasing other inputs.

Uploaded by

Alex Moore-Minott
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Unit #1: Foundations of Economics

Ch. #5: The Law of Increasing Opportunity Cost and The Law of Diminishing Marginal Returns

Recall in Ch. #4 that the production possibilities curve or frontier (PPC or PPF) shows production with
limited resources and its impacts (given the following assumptions: It is a simple model of a society’s
ability to produce – the PPC or PPF uses two resources to represent many resources and assume the
resources and technology are ae fixed.
In addition, there is another limitation beyond not having enough resources. Production is also limited
by the law of increasing opportunity costs. This law states that as more resources are devoted to
producing more of one good, more is lost from the other good. The same table and graph from Ch. #5
demonstrates this. Please refer to the table and graph below.
A table (shown below) is plotted into a graph to create the PPC or PPF.
Wheat Cotton
A 200 300 Law of increasing opportunity cost,
B 160 400 explained.
C 80 480
As more resources are diverted (shifted)
from wheat to cotton, the production of
The points (A,B, and C) are graphed to give the PPC or cotton will increases, but by smaller and
PPF: smaller amounts (it is increasing at a
decreasing rate).
At the same time, more and more wheat
is lost. In other words, the production of
wheat is declining by greater and greater
amounts: the opportunity cost is
increasing.
The reason for the law of increasing
opportunity cost is due to the fact that
some resources are not well suited for
certain types of production. Some
resources are better at producing some
Source: http://beta.tutor2u.net/economics/reference/production-
goods as opposed to others. In this case,
possibility-frontier
the workers, field, and fertilizer may
work better at producing wheat than
cotton. This is demonstrated by the fact
The law of increasing opportunity cost and the
that again, the production of cotton is
production possibilities curve or frontier (PPC or PPF)
rising, but by smaller amounts each
also introduces the concept of marginal analysis.
time, and the production of wheat is
Marginal analysis is explained on the next page.
declining by larger amounts each time.

Continue to the next page

1
Unit #1: Foundations of Economics
Ch. #5: The Law of Increasing Opportunity Cost and The Law of Diminishing Marginal Returns

The Law of Diminishing Marginal Returns


The law of diminishing marginal returns is a law of economics that states an increasing number of new
employees causes the marginal product of another employee to be smaller than the marginal product of
the previous employee at some point.

For example, a factory employs workers to manufacture its product. As long as all other factors of
production stay the same, at one point, each supplementary worker generates less output than the
worker before him. Thus, each worker who follows provides smaller and smaller returns. If the factory
continues to add new workers, it eventually becomes so cramped that additional workers hinder the
efficiency of other employees, thereby decreasing the factory’s production

Source: http://www.investopedia.com/terms/l/lawofdiminishingmarginalreturn.asp#ixzz4sZT9NYsh
In other words, because the land and capital is fixed, as you add workers to production, there are less
resources for them to use and eventually they will add less and less to total production.

*Marginal Product of Labor = Marginal Product

If we assume (ceteris paribus), that the capital


equipment the workers have to use is fixed and
cannot be increased, then as more workers are
added they will run out of capital equipment.
Less capital equipment per worker means they
will be less productive.

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